MANJU DEVI AGARWAL ,HOWRAH vs. ITO, WARD - 46(1), KOLKATA

The assessee has raised the following revised grounds of appeal: “

The next important point is that even though reasons as recorded may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment all that is necessary is the information of prima facie belief that an income has escaped the assessment; and it is not necessary the fact of income having escaped is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the AO can form the belief that an income has escaped assessment. Merely because some further investigation have not been carried out, which if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factor which indicate an income escaping the assessment and the factor which indicates a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relations with the income escaping assessment. The later category consists of fact, which if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of cause and effect relations between reasons recorded and the income escaping assessment. While dealing with this matters, it is useful to bear in mind the following observation of Hon’ble Supreme Court in ITO Vs. Lakhmani Mewal Das (1976) 103 ITR 437 (SC): “the reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from the assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening and at the same time, we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.”

With the aforesaid ratio decidendi and principles quoted by the judicial precedents laid by the Constitutional courts in the back-drop, when I examine the validity of the 5 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 reopening of assessment by the AO, first of all I have to examine the reasons recorded by the AO for reopening the assessment. The reasons recorded for reopening can be seen reproduced at page 3 of the assessment order wherein the AO had reproduced the letter of the assessee objecting to the reopening, from where I have culled out the reasons recorded by AO which is as under: “An information regarding systematic evasion of taxes by clients/members of the NMCE during the different financial years by misuse of the NMCE Platform pertaining to FY 2009-10 through bogus commodity trading have been received from DDIT (Inv.), Unit-3(1), Kolkata. Based on the Forward Market Commission (FMC) report that “clients/member of the NMCE were found to be involved in creating artificial volume and suspected evasion of income tax by misuse of NMCE platform. Departmental database was also checked to identify the nature of companies/entities and it was found that Avenue Dealers Pvt. Ltd. is found to be shell companies which are managed and controlled by the various Kolkata based entry operators like Shri Devesh Upadhyay. Statement of Shri Devesh Upadhyay in respect of Avenue Dealers Pvt. Ltd. has also been recorded. During the various search and seizure operations, investigation/enquiry carried out by the Directorate, the entry operators accepted that those companies are shell/paper companies which are engaged in providing accommodation entries in various forms to the beneficiaries. However, from the information in possession with the department, it came to notice that the assessee, Gopal Prasad Agarwal is one of the beneficiaries who have taken bogus profit during the FY 2009-10, trading was done through suspended/penalized brokers/members, most of the client are found to be shell/dummy entities and the statement of entry operators/individual in which they have accepted that the loss which was booked was bogus loss/profit to facilitate accommodation bogus loss/profit to the beneficiaries.”

From a reading of the reasons recorded it is clear that the AO has received an information from DDIT (Inv.) Unit-3, Kolkata regarding systematic evasion of taxes by clients/members of the NMCE during the financial year by misuse of the NMCE platform through bogus commodity trading have been received by him. Thereafter, the AO states about the report of the Forward Market Commission (FMC) that the clients/members of the NMCE were found to be involved in creating artificial volume and suspected evasion of income tax by misuse of NMCE platform. Thereafter the AO states that when the departmental data base was checked to identify the companies/entities involved in this practice it was found that M/s. Avenue Dealers Pvt. Ltd. is a shell company it was managed and controlled by various Kolkata based entry operators like Shri Devesh Upadhyay. And thereafter the AO notes that the statement of Shri Devesh Upadhyay has been recorded; and that during various search and seizure operations the entry operators accepted that those companies are shell/paper companies which are engaged in providing accommodation entries in various form to the beneficiaries. Thereafter, the AO in his reasons recorded notes that from the information in possession of the department it came to notice that the 6 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 assessee’s is one of the beneficiary who have taken bogus profit during the assessment year and trading was done through suspended/penalized brokers/members and most of the clients are found to be shell/dummy entities and the statement of entry operators/individuals have been obtained wherein they have accepted that loss which was booked was bogus loss/profit to facilitate accommodation of bogus loss/profit to the beneficiaries.

So, from the aforesaid discussion, when I analyze the reasons recorded by AO to re- open the assessment on a standalone basis it is noted that the information the AO received generally speaks of evasion of taxes by clients/members of NMCE by misuse of NMCE platform for the year under consideration through bogus commodity trading which has been passed to him by the DDIT (Inv.), Unit-3(1), Kolkata. Thereafter, the AO refers to the Forward Marketing Commission’s report about misuse of the NMCE platform which has given a report about certain clients/members involved in creating an artificial volume and suspected evasion of income tax. (So, I note that both the information from DDIT (Inv.) and FMC are general in nature and not specifically in respect of assessee’s before me.) Thereafter, the AO refers to the departmental data base which has been checked to identify the nature of the clients/entities and it was found that M/s. Avenue Dealers Pvt. Ltd. is a shell company which is managed and controlled by various Kolkata based entry operators like Shri Devesh Upadhayay. His statement as well as statements of various entry operators have been recorded who have accepted that they are engaged in providing accommodation entries through various shell/paper companies to the beneficiaries. (This action of checking the departmental data base does not throw any light of assessee’s wrong action and their connection with M/s. Avenue Dealers Pvt. Ltd. which is also general in nature and concerning M/s. Avenue Dealers Pvt. Ltd. and from the reasons recorded I cannot discern what is the nexus of M/s. Avenue Dealers with assessee in question)

Thereafter, the AO states that he is in possession of information from which he noticed that assessee Shri Gopal Prasad Agarwal is one of the beneficiary who have taken bogus profit for the year under consideration and trading was done through suspended/penalized brokers/members and most of the clients have been found to be shell/dummy entities and the statement of the entry operators/individuals show that they have accepted that the loss which was booked was bogus loss/profit to facilitate accommodation of bogus loss/profit to the beneficiaries. So, I find from a reading of the 7 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 above reasons recorded by the AO to reopen the assessment that it is vague and generalized report/information/allegation which has kindled the suspicion in the mind of the AO from the information he got from the DDIT (Inv.) about systematic evasion of taxes by clients/members of NMCE by misuse of the NMCE platform ;and based on the report from the Forward Market Commission that clients/members of the NMCE were found to be involved in creating artificial volume and suspected evasion of income tax by misuse of the NMCE platform. Thus, from two sources the AO had got information that NMCE clients/members were misusing the NMCE platform and it is case of suspected evasion of income tax by misuse of NMCE platform and there is nothing in the information/report about any wrong doing/nexus with assessee’s before me. Thereafter, the AO states about checking up the departmental data base from where he realized that M/s. Avenue Delaers Pvt. Ltd. is a shell company and are managed by entry operators from Kolkata like Shri Devesh Upadhyay and his statement was recorded who revealed that he was into providing accommodation entries to various beneficiaries. Here also there is nothing to point a finger at assessee’s before me. Thereafter, the AO concludes that from the information which is in possession of the department the assessee is one of the beneficiaries who have taken bogus profit through suspended/penalized brokers/members. The conclusion of AO does not have any nexus with the information which he discussed in the initial paragraph of his reasons. The reason to believe does not spell out any connection of assessee’s with M/s. Avenue Dealers and what wrongful conduct of assessee has been detected by the Investigation Wing or FMC is discerned from the reasons recorded. Moreover, I note from the said reasons recorded by AO that no where it is stated as to how the assessee got profit which he has derived from the commodity trading with M/s. Avenue Dealers Pvt. Ltd. and what is the connection of assessee with its director Shri Devesh Upadhyay. Though it was stated that Shri Devesh Upadhyay’s statement was recorded there is no whisper as to whether the assessee has been named by Shri Devesh Upadhyay to be a beneficiary. The reasons recorded has not provided the details of the transaction alleged to be bogus such as nature of the commodity, dates and about the contracts as well as the number of contractee the assessee have entered into for taking the alleged bogus entries. The details of the bank transactions also are found absent. The reasons recorded by the AO is totally silent with regard to the amount and nature of bogus entries and transactions and the persons with whom the transactions had taken place. From the reasons recorded itself it can be seen that based on the report of the FMC and DDIT (Inv.) for suspected evasion of tax by 8 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 clients/members of the NMCE who misused the NMCE platform to book bogus profit/loss it has been reopened. I note that assessee had shown in his return of income commodity profit under the head ‘other income’, so the AO based on the FMC report and the DDIT(Inv.) report traced out all the persons who had shown profit/loss from commodity trade using NMCE platform for assessment year 2009-10 had ventured to reopen on suspicion and conjectures. It should be kept in mind that information adverse may trigger “reason to suspect” then AO had to make reasonable enquiry and collect material which would make him belief that there is in fact escapement of income, which unfortunately the AO has not taken the burden to do in this case. The Hon’ble Delhi High Court in a similar case had quashed the assessment in the case of CIT Vs. M/s. Insecticides India Ltd. in ITA Nos. 608 & 609 of 2012 pronounced on 20.05.2013 wherein the Hon’ble High Court on similar facts dismissed the appeal of the Revenue and upheld the decision of the Tribunal quashing the proceeding initiated u/s. 148 of the Act. In that case the reasons recorded by the AO were totally silent with regard to the amount and nature of bogus entries and transactions and the persons with whom the transaction had taken place. It is also taken note that in Ganga Saran & Sons Pvt. Ltd. (1981) 130 ITR 1 (SC) the Hon’ble Supreme Court held that the expression “reason to believe” occurring in section 147 is “stronger” than the expression “is satisfied” and from the discussions made above, I am of the considered opinion that such requirement under the law has not been made in the reasons recorded in the instant case to reopen the assessment and, therefore, the reopening and consequent reassessment is not valid in the eyes of law and, therefore, all the consequent proceedings are null in the eyes of law.

Moreover, I note that the assessee had objected to the reopening by submitting letter dated 07.12.2017 which has not been disposed of by the AO by passing a speaking order as required by the Hon’ble Supreme Court in GKN Driveshaft India Ltd. Vs. ITO 259 ITR 19 (SC). The Hon’ble Calcutta High Court in Sahara India Commercial Corporation Vs. DCIT 2002 CTR 501(Cal) held that “the order passed on objection was bad in law being a non-speaking order. In such a case, the assessee should not be sent to the appellate authority. The assessee company was entitled to get the speaking order. Therefore, the assessment order as well as the order passed on the objections was set aside.” Therefore, on this score also respectfully following the decision of the Hon’ble jurisdictional High Court the action of the AO cannot be sustained. Further it is also noted from a perusal of the 9 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 reassessment order passed by the AO that the AO asked the assessee to produce the books of account, documents, ledger copies etc. and from a perusal of the same, he found that the assessee had carried out most of the sales and purchase of commodity shares were done by M/s. Advent Commodities Pvt. Ltd. from the client of M/s. Konark Commodities Pvt. Ltd., Prognosis Commodities Pvt. Ltd., PKC Commodities Pvt. Ltd., Maruti Commodities Pvt. Ltd. etc. and these brokers were found to be involved in the artificial trading of shares by misuse of NMCE platform. It is noted that the AO in the reassessment order has changed tact and referred to sub-broker M/s. Advent Commodities and the statement of Shri Rishi Kumar Somani, director of M/s. Advent Commodities were relied upon to make the allegations against the assessee and the whole case is built up on M/s. Advent Commodities, PKC Commodities and that of Shri Pawan Kumar Kayan, the director of PKC Commodities and in the assessment order the AO concludes that it is proved beyond doubt that the profit declared by the assessee was not in the nature of commodity profit which the assessee declared as income from other sources as it was done not as a genuine business and according to him, the following facts emerged from the fictitious transaction done by the assessee through NMCE: i) The assessee had not paid any margin money to the broker before entering into commodity trading transaction; ii) The broker has accepted during the survey u/s. 133A that the director of M/s. PKC Commodities is dummy person.

I note that the Hon’ble Bombay High Court in the case of Bonanja Commodities Brokers Pvt. Ltd. Vs. Mrs. Roshanara Bhinder (arbitration petition 195 of 2015 dated 16.04.2015) has held that the collection of margin money as per bye laws of MCX Stock Exchange Ltd. is only discretionary in nature and transactions entered into by the clients without payment of margin money cannot be considered as illegal; And the AO has made the allegations against the assessee on the strength of the statement recorded during survey which has no evidentiary value as held by the Hon’ble Supreme Court in CIT Vs. S. Kader Khan & Son (2013) 352 ITR 480 (SC). It is also noted that NMCE pursuant to the notice of the AO in the case of assessee had replied vide letter dated 02.11.2017 has accepted that Shri Gopal Prasad Agarwal, Smt. Manju Devi Agarwal and Smt. Payal Agarwal (appellants before us) are registered as clients being members of the Exchange had made transactions in the commodity future products and not in shares and the Chief Compliance Officer of the 10 to 1773/Kol/20-19 Gopal Prasad Agarwal & Ors, AY: 2010-11 Exchange has also provided all the details of the transactions made by the appellants to the AO and the AO could not find out any adverse material against the appellants. It is also noted that the Exchange member M/s. PKC Commodities Ltd. had surrendered the membership of exchange on 03.02.2012 and the year under consideration before us is AY 2010-11. In the light of the above, no adverse view could have been taken against the assessee. The allegation of attributing illegal conspiracy/activities etc. is hurled without any basis and therefore, on merits as well as on the legal issue the assessee succeeds and, therefore, since the assessee succeeds in respect of the legal issues itself, since the AO did not satisfy the condition precedent for assuming jurisdiction to reopen the assessment, the notice issued u/s. 148 itself is null in the eyes of law and, therefore, all the subsequent proceedings are null in the eyes of law and therefore, the reassessment order is quashed and resultantly all the three appeals are allowed.

In the result, all the appeals of assessee are allowed.